Transferable Tax Allowances

Andrew Bingham Excerpts

Wednesday 28th November 2012 Westminster Hall

[Jim Shannon (Strangford) (DUP)]

I am glad to have the opportunity to contribute to the debate on transferable tax allowances. I commend the hon. Member for Peterborough (Mr Jackson) for securing time for hon. Members to consider this important subject, on which, as the Member of Parliament for Strangford and a member of the Democratic Unionist party, I have received considerable correspondence. It is an important issue.

At Westminster, the DUP has been pushing the Chancellor to introduce recognition of marriage in the system. We are keen to support the Government on that policy, which the Conservative party advocated in opposition. That party’s proposal envisaged a system whereby married couples would be able to transfer part of their personal tax allowance to their spouse. An individual in the UK could earn £8,105 per year tax free under the Conservative party proposals, and if someone did not use their full personal allowances, up to £750 could be transferred to their spouse, which would amount to a tax cut of £150 for that family. Reports in the media have led us to believe that that might be on the way. The Minister will perhaps respond; he may not have Pandora’s box or all the answers today, but if the proposals are in the Budget or the autumn statement, we will give them our full support on the Floor of the House.

Until relatively recently, the UK recognised marriage in the tax system, but that changed as a consequence of decisions taken by the Labour Government. There is only one Labour Member here, and I usually support Labour on many issues in the House, but I am very much opposed to its position on this. The absence of Liberal Democrats from the debate tells a story in itself.

We find ourselves in the minority in the OECD. Only 20.1% of people in the OECD live in countries that do not recognise marriage or have a spousal allowance. In that context, it is not surprising that married couples get a bad deal. In “The Taxation of Families”, Pearson and Binder, using the latest figures from the OECD, illustrate that in 2011 a one-earner married couple on an average wage with two children faced a tax burden 42% greater than the OECD average. The hon. Member for Peterborough mentioned that in his contribution.

The UK tax system currently is intensely individualistic. Taxation gives single people with no family responsibilities a relatively easy ride, by comparison with married couples. That can be clearly seen in the fact that in 2011 the tax burden on a one-earner married couple on an average wage with two children was 73% as a percentage of that placed on a single person on the same wage, while the OECD average was just 5%.

The statistics illustrate that the UK makes things more financially difficult for married couples than our compatriots in the OECD do. To my mind, and the minds of most of us here, that is deeply concerning. I have always believed that marriage is a hugely important social institution, which provides significant benefits to the couple involved, the children born to the couple and society at large. We certainly should not make it more difficult for couples to marry in this country than it is in other developed countries, such as France, Germany and the USA. Why would we not want to recognise the importance of marriage and show our support for children being brought up by parents in the stable environment of marriage?

For the couple, marriage produces significant benefits, including public benefits that are not without consequence for the Exchequer. The figures have already been outlined. Research indicates that even the poorest 20% of married couples are more stable than all but the richest 20% of cohabiting couples. Marriage has a positive impact on the mental well-being of the couple. The health gain of marriage could be as large as the benefits of giving up smoking, for example. Such examples are only a small portion of the benefits that marriage can often bring to couples who enter into it.

The social science evidence on the impact of marriage on children demonstrates significant public benefit. The scale of the benefits to children raised in married families is striking. The hon. Member for Peterborough outlined the differences between the outcomes of children of married parents and of unmarried parents. I will not go over that again, owing to the lack of time, but the need for a change has been clearly illustrated.

It is important to stress that I am not so naive as to suggest that Governments have the capacity to make marriages happy and strong—they are not marriage guidance counsellors or Relate. The Government do however have a role in not making it more difficult for couples, who fall in love and want to be together, to marry in this country than in it would be in another country. The current policy position is misguided and we urgently need to change direction.

[Andrew Bingham (High Peak) (Con)]

As the hon. Gentleman said, it is not the Government’s role to be marriage guidance counsellors, but does he agree that introducing transferable allowances, as my hon. Friend the Member for Peterborough (Mr Jackson) outlined, would send a strong and clear message to the whole population that we support marriage? I have been married for 26 years—I hope I have got that right! It is a fantastic institution and has been for many years.

[Jim Shannon]

As someone who has been married for 25 years—just a year less than the hon. Gentleman—I wholeheartedly endorse what he says. Marriage is important for a great many of us.

The problem can be remedied in a positive way by introducing a transferable allowance for married couples, as the hon. Member for Peterborough suggested. The Prime Minister and the Conservative party have promoted the idea, but the main barrier has been the Liberal Democrats. The Deputy Prime Minister has said that

“we should not take a particular version of the family institution, such as the 1950s model of suit-wearing, breadwinning dad and aproned, homemaking mother, and try and preserve it in aspic.”

That statement clearly demonstrates immaturity and inconsistency on his part. The proposal is not about keeping women away from work and forcing them to stay at home, but about allowing the flexibility that we should have in the tax system, so that if either one of the couple does not use their full tax allowance, a portion of it can be passed to the other. At the same time, the Deputy Prime Minister has called for paternity leave to be increased from two to six weeks, but he does not want to make it easier for parents who already stay at home and do not use their full personal allowance. I suggest that that shows double standards.

Such an allowance would make the tax burden more sensitive to family responsibilities. It would also disproportionately benefit families in the poorer half of the income distribution. The Institute for Fiscal Studies, commonly referred to by all parties in the House, says that 70% of the benefit from a transferable allowance would go to those in the lower half of the income distribution. In other words, it would benefit those who need it most in a fair and balanced way, as it should.

We are all interested in reducing child poverty. The introduction of a transferable allowance would particularly help to address it by reducing the number of children living in households with an income below 60% of the median. In considering that point, it is important to remember that how materially wealthy individuals are depends not simply on income but on the size of their family.

A couple on £35,000 with two children is likely to be better off than only 37% of the population, even when tax credits and child benefit are taken into account, whereas a single person on £35,000 is in the top 20% of the population. We can blind people with figures, but they illustrate a clear trend—those in a marriage are disadvantaged under the current system. A two-earner couple with an income of £35,000—one working full-time and one part-time—is also in the poorer half of the population, but better off than the one-earner family. If the income were split equally, they would probably be in the fifth sector—better off than 44% of the population.

Some 2 million children are in one-earner couple households. Around 900,000 of them are in households with an income below 70% of the median. Of those, between 600,000 and 700,000 live in households with incomes below 60% of the median. A transferable allowance would reduce the number of households with incomes that fall below 60% of the median. It makes sense to make changes and to make them soon. A transferable allowance would reduce the number of households currently facing a 73% marginal tax rate. In so doing, it would particularly help the poorest one-earner families, whose efforts to earn their way out of poverty are jeopardised by the extraordinarily high tax rate.

The 73% marginal effective tax rate is a direct consequence of the UK tax system’s failure to recognise family responsibilities in any way. It places the burden entirely with the benefits system, rendering the withdrawal of benefits a more significant event for marginal effective tax rates. In the current tax year, a quarter of all families have an effective marginal tax rate of 73% or more: income tax accounts for 20%; national insurance contributions for another 12%; and the tax credits taper accounts for a further 41%. A family with two children and an income below £31,356 will pay 73% on any additional income. A family with four children will pay 73% on incomes below £43,838.

The figures do not take account of pension payments, so in many cases the 73% tax rate reaches even higher up the income scale. When pension contributions are taken into account, that 73% could apply to families earning £45,000. Around 2 million families are in that position, so one in four of all families in the United Kingdom of Great Britain and Northern Ireland faces a marginal rate of 73% or higher. That is deeply concerning and is an important reason for change.

Things will get even worse with the introduction of universal credit. The marginal effective tax rate of such families will actually increase from 73% to 76%—another three percentage points. Only 300,000 people have been affected by the top 50% rate, but, by contrast, 2 million will be locked into a system in which the Treasury will take back more than 76p of every extra pound earned. They are not “welfare spongers” but hard-working families, whom we are here to represent, which is why we are discussing this proposal today. I commend the hon. Member for Peterborough for securing the debate.

The economic and social costs of such a high marginal rate on such an important section of the community might be difficult to calculate, but they are considerable. The only way to reduce the number of families trapped by high marginal tax rates is to reduce the number who need to receive credits. The way to do that is to change income tax rates so that they become more sensitive to family responsibilities and place less of a burden on families, who will therefore not need to be compensated through credits. Transferable allowances are an obvious way of doing that.

The Government are right to place the economy at the top of their agenda—I support that—and to try to cut the deficit to reduce our debt burden. However, underlying problems in our country are contributing to the financial burden on the state. Strong marriage and strong families are key to fixing what the Prime Minister has called “broken Britain”, which is why I support them.

In parliamentary debates and questions, I have put it on the record that, as others have stated, it will take 12 months from the passing of legislation to make changes and implement them. If the Government introduce such changes in March 2014, they will be too late; it needs to be done in this autumn statement to come into effect next year.

Supporting the transferable tax allowance and addressing the double penalty of tax credits and the benefit system would send a significant message and signal the importance that this Government—our Government—are placing on marriage. The proposal will have the full support of the Democratic Unionist party. Today’s debate is exactly a week from the autumn statement, so I call on the Minister and the Chancellor to prioritise the announcement next week that the transferable tax allowance will be in the 2013 Budget. That is the best way forward.